Trust Accounting Breach Costs Agent Thousands

Journal, Sales,  Salespeople

In the March 2019 Journal, we considered decision of the Queensland Civil and Administrative Tribunal (the Tribunal) regarding the operation and interpretation of ss 26 and 27 of the Agents Financial Administration Act 2014 (Qld(the AFA Act). 

Background

On or around 21 March 2016, Jianjie Li (the buyer) entered into a contract to purchase a residential property (the property) from Hetalbin and Milin Patel (the sellers). A deposit in the amount of $24,500 was paid by the buyer into the agent’s trust account (the deposit). On or around 24 March 2016, the buyer’s solicitors advised the sellers’ solicitors that the buyer had been unable to obtain finance and terminated the contract. The buyer’s solicitors requested that the deposit be returned to the buyer. The sellers’ solicitors raised some concerns in relation to the buyer’s attempts to obtain finance, but did not dispute the termination of the contract or claim for the deposit. 

On or around 31 March 2016, the agent wrote to the parties, advising that it would not return the deposit in circumstances where: 

1. the agent considered that the sellers were entitled to the deposit in dispute; and 

2. it was authorised under s 26 of the AFA Act to pay the amount in dispute to the sellers on or after 1 June 2016, unless:

(a) a proceeding disputing the sellers’ entitlement to the deposit was commenced; or 

(b) the buyer and sellers authorised payment of the deposit to the sellers before 1 June 2016. 

On or around 13 April 2016, the sellers’ solicitors wrote to the agent and advised that the contract had been terminated by the buyer. The sellers’ solicitors instructed the agent to release the deposit to the buyer. 

On or around 13 May 2016, the buyer lodged an application in the Supreme Court seeking a declaration that the contract was terminated and that the buyer was entitled to the deposit. On 3 June 2016, the Supreme Court dismissed the application on the basis that the matter should have been commenced in the Magistrates Court. On the same day, the agent informed the parties that it had released the deposit to the sellers in accordance with the notice it had issued on 31 March 2016.  

In fact, the agent had paid the deposit into its general account, retained commission in the amount of $20,000, and remitted only $4,500 to the sellers.  

The buyer submitted a claim to the Chief Executive of the Department of Justice and Attorney General against the Claim Fund established by the AFA Act. The agent subsequently sought a review of the decision that the buyer was entitled to the full deposit, and that the agent and its director were liable for the buyer’s financial loss.  

The Tribunal dismissed the agent’s application for review, concluding that the agent and its director were jointly and severally liable to reimburse the Claim Fund $24,500 for payment of the deposit to the buyer.  

On the same day that decision was delivered by the Tribunal, the agent was convicted in the Holland Park Magistrates Court of an offence under s 28(2)(a) of the AFA Act, fined $5,000 and ordered to pay costs of $2,223.75.  

The agent subsequently appealed against its conviction, the penalty and quantum of the costs order.  

Want more information on trust account breaches? See also: Don’t be tempted to touch that trust account

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The District Court decision[1] 

Section 28(2)(a) of the AFA Act provides that an agent must pay an amount in dispute immediately if notice under s 27(2)(a) is received, to the person stated to be entitled to the amount, or in accordance with the direction provided in the notice.  Written notice under s 27(2)(a) must be from all parties to the transaction, in this instance, the sellers and the buyer.  

The agent did not submit that notice had not been received from both parties. Instead, it argued that it had ‘dealt with’ the amount in dispute, the deposit, by providing notice pursuant to s 26 of the AFA Act. Accordingly, the agent argued that s 27 of the AFA Act did not apply and therefore, it could not be convicted of an offense under s 28.  

Therefore, the main issue for the Court to consider in determining the agent’s appeal was whether the agent was bound by the operation of s 28(2)(a) of the AFA Act when it received instructions from the sellers’ solicitors on 13 April 2016, or whether it was entitled to rely on the notice it had previously provided in accordance with s 26 of the AFA Act.  

The Court stated that: 

“The process provided for in s 26 consists of giving a notice under s 26(2) and exercising a discretion to pay the stated person under s 26(3).” [2]

The Court held that the effect of ss 26, 27 and 28 of the AFA Act is that: 

(i)s 27 applies unless the amount in dispute is dealt with under s 26; 

(ii)giving a notice under s 26(2) does not mean that the transaction fund or part therefore constituting the amount in dispute is dealt with; 

(iii)the amount in dispute is not dealt with under s 26 until the discretion to pay the amount pursuant to s 26(3) is exercised; 

(iv)s 27 does not apply if payment has been made pursuant to s 26(3); and 

(v)once notice is received under s 27(2)(a) prior to the amount in dispute being dealt with under s 26: 

  • the obligation under s 28(2)(a) applies and 
  • s 26 has no more work to do.” [3]

The Court considered the state of affairs when the offence was allegedly committed on 14 April 2016. The Court held that at that time, the agent had not disbursed the deposit from its trust account, so the amount in dispute had not been dealt with in accordance with s 27 of the AFA Act. Therefore, the agent was required to make immediate payment to the buyer and committed an offence under s 28(2)(a) of the AFA Act by failing to do so.  

Accordingly, the Court dismissed the agent’s appeal against conviction.  

In relation to the agent’s appeal against the fine of $5,000, it argued that it was manifestly excessive in circumstances where the offence was due to the agent’s misunderstanding of the relevant sections of the AFA Act.  

In dismissing the agents appeal against the penalty imposed, the Court considered the agent’s submission and noted that the agent “rejected the express wishes of the parties to the transaction and instead, dealt with the money by taking it, or most of it, for itself”. [4]

Further, the Court noted that the agent failed to suggest at any stage that the position it adopted was based upon advice.  

The agent applied for leave to appeal the decision of the District Court. 

The Court of Appeal decisions[5]

The agent was initially successful with its application for the orders of the Magistrates Court and District Court to be stayed pending the determination of its application for leave to appeal. The Court of Appeal held that the prejudice to the agent if the orders were not stayed was evident in that it had been ordered to pay costs in excess of $5,000 in addition to the conviction and $5,000 penalty imposed. 

However, the agent’s leave to appeal was subsequently refused by the Court of Appeal.  

The Court of Appeal held that there was nothing in the agent’s submissions that established that there had been an error of law in the decision of the District Court. The Court of Appeal ordered that the agent pay the costs of the application for leave to appeal.  

Conclusion

As is evident from these decisions, a breach of the trust accounting procedures prescribed by the AFA Act can be costly. In total, taking into consideration the amount to be reimbursed to the Claim Fund, the penalty imposed for the breach of s 28(2)(a) of the AFA Act, and three costs orders against the agent, the decision not to proceed in accordance with the instructions received from the sellers’ solicitors on 13 April 2016, is likely to cost the agent in excess of $40,000.  

Accordingly, it is imperative that agents have appropriate mechanisms in place to ensure that all trust monies are dealt with appropriately and strictly in accordance with the AFA Act. If an agent is in any doubt as to what steps to take in relation to trust monies, they should err on the side of caution and seek legal advice.  

References:
[1] Prestige & Rich Pty Ltd v McGregor [2019] QDC 151.
[2] Ibid [44].
[3] Ibid [50].
[4] Ibid [65].
[5] Prestige & Rich Pty Ltd v McGregor [2019] QCA 225 and Prestige & Rich Pty Ltd v McGregor [2020] QCA 220

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